Buoyed by the success of the gradual increases in the price of diesel that has led to the under-recovery on the fuel being nearly wiped out, the government is considering similar price increases for domestic cooking gas and PDS kerosene. If implemented, this could result in the most potent subsidy reform the country has ever witnessed and significantly improve government finances over two to three years.

The ministries of petroleum and finance, sources said, are discussing the options of hiking domestic LPG price by a modest R10 per cylinder and the price of PDS kerosene by R2 a litre every month. The final decision on the issue will be taken by Cabinet Committee on Political Affairs (CCPA).

Every rupee increase in kerosene price would lead to a Rs 850-crore annual reduction in under-recovery of oil marketing companies, while a R1 increase in the price of LPG refills would reduce the same by an annual R100 crore.

These staggered hikes would take a long time to end the current losses of R32.87/litre of kerosene and R432.71 per domestic cylinder refill, but the government believes these would lead to market-linked fuel prices in the long run.

Interestingly, the proposal has come up when the Indian basket of crude oil has rallied 4.55% this month from $106.88 per barrel on June 2 to $111.75 a barrel on June 23. Every dollar increase in the global crude oil price impacts diesel subsidy by R3,300 crore, while the impact on domestic LPG is R400 crore and R700 crore for PDS kerosene.

The under-recovery on diesel is now down to R1.62 per litre (thanks to gradual price increases of 50 paise a month over several months) and the government aims to make the fuel’s price totally market-determined. Every dollar increase in global crude oil price, for instance, could raise the price of diesel by about 40 paise a litre.

In FY 14, the under-recovery on PDS kerosene stood at R30,575 crore, while it was R46,458 crore for LPG.

In the current financial year, government expects the same on kerosene to be around R29,000 crore, while for domestic LPG it should be around R47,000 crore at the average crude oil price of $107 per barrel.

In January 2013, the previous Congress-led UPA government decided to raise diesel prices by up to 50 paise per litre every month. This is being continued after the BJP came to power in May.